Saturday, October 11, 2008

New Banks!

So while I was watching CNN yesterday while the markets were doing their Chicken Little dance, and they had a guest ec0nomist named Khan, or maybe Cahn--- at any rate he wasn't their regular correspondent Riz Khan--- who had a solution to the debt crisis so pleasingly science-fictional that I immediately fell in love with it.The $700 billion bailout is intended to buy or somehow guarantee the toxic debt taken on by banks, so that they can then feel free to lend money again.But, as Khan points out, what if they don't? What if they just hang onto the money as a hedge against other parts of their debt turning toxic--- which, as Khan pointed out, is happening very fast as every conceivable investment begins to go down the tubes.He also pointed out that $700 billion is more than all of our banks are worth. So what he suggested doing was using the money to capitalize about thirty brand-new national banks. The new banks won't have toxic debt, they can start lending right away. The old banks either fail or don't, but it doesn't matter either way, the money system is safe and full of cash.And--- so that we don't end up with thirty huge state-owned banks--- the banks then issue stock which is distributed evenly to every taxpayer in the U.S. They'll never do it, because it doesn't serve the interests of anyone but the taxpayer, but isn't this a totally cool new meme?

6 Comments:

The problem is that banks are more than a stash of money in a pretty building. There's a huge infrastructure involved in lending out money safely (or even unsafely, as was done in the recent past), keeping track of it, fulfilling regulatory requirements, etc. Even when two banks merge the integration process is a lot of work.

It's be much easier to recapitalize banks and replace their management (decapitate) and leave the bottom 90% of the staff in place.

That would be marvelous, wouldn't it? Also, replacing the upper management of the currect banks and prosecuting them for fraud would be a decent second. Fortunately for the d-bags at the top, neither will happen.

Um, the "status quo" is a crashing market. This isn't about "restoring the status quo", unless you consider getting things back to where they were eight years ago to be restoring the status quo.

Losses have already happened. The purpose of this "bailout" is, basically, government loan guarantees. It's the government saying that it will use taxpayer money to reduce the risk of these CDO's and therefore it's okay to keep trading them. If someone buys a CDO and then all the loans in it go into default, the government will repay the owner.

I know that it's very comforting to imagine solving the world's problems by punishing rich white dudes for being rich and white (and also dudes), but in this kind of situation it's really important to keep the emotional response out of things. Masturbation won't make a baby no matter how good it feels.

halojones- if you were rich from 15 years of profits and earnings working in the FIRE economy, were looking at near total wipe out, and the government handed you real cash in exchange for your bad debts, would you turn around and invest that cash in imploding assets once you had it in your hands?

They cannot force the market to lend money for a loss once the market has the money.

Make no mistake, workers of the FIRE economy are on top of America's socioeconomic pyramid, this plan will keep them there since when it is all over, the US government will go broke and default.

... and to respond to an earlier comment by S.M. Stirling which is related to this- you may not see printing money to prevent technical default as a form of default- I don't think most market participants would agree with you. Technically, there are something like 7 ways a nation can default on ts debts (according to Niall Ferguson in Cash Nexus)- we will see what approach Iceland takes and slowly the domino's will go from there.

If we continue down this path, we will default in all but technical terms.

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I'm an author, game designer, black belt, and scuba guy. This is a journal of my confrontations with existence, the life of the writer, and the occasional wicked adverb. There also seems to be a lot about food. Bon appetit.